Europe Seeks to End Discord Over Banking Union

An impasse over plans for the European Central Bank to supervise banks takes centre stage at a finance ministers' meeting.

BRUSSELS -- An impasse over plans for the
European Central Bank to supervise banks, the European Union's
most ambitious financial reform, takes centre stage at a finance
ministers' meeting on Wednesday.

France and Germany, traditionally leaders in such
integrationist moves, are at loggerheads over parts of the plan,
and there is little time left for the EU to meet a commitment to
complete the framework for banking union by the end of the year.

Critical questions remain unanswered, such as how many banks
the ECB should directly supervise and whether the central bank
gets longer than one year, as planned, to fully take on its
role.

After three years of piecemeal crisis-fighting measures,
agreeing on a banking union would lay a cornerstone of wider
economic union and mark the first concerted attempt to integrate
the bloc's response to problem lenders.

But reaching a deal, which EU leaders want to sign off when
they meet at a summit on Thursday and Friday, will require
addressing the concerns of Germany, whose support is crucial,
while also satisfying France and others with deep vested
interests such as Britain, Sweden and the Netherlands.

"It's not an easy one for Germany," said one diplomat, close
to the talks. "But the markets are watching us."

Another diplomat said it came down to a conflict between
quality and speed: For the best banking union possible to be put
in place it will take time and it may be necessary to extend
agreed deadlines.

Berlin is concerned that supervision will develop into a
scheme under which it is left to foot the bill for European
banks too weak to survive when, as is planned, a central
resolution scheme is set up to close troubled lenders.

It is also worried about a potential conflict of interest
between the ECB's double role as supervisor and as guardian of
monetary policy. Such a conflict could arise if the ECB were to
decide to keep interest rates low to prop up banks.

In a sign of the tensions last week, German Finance Minister
Wolfgang Schaeuble publicly clashed with France's finance
minister at a meeting intended to finalise the plan.

Schaeuble objected to the ECB's Governing Council having the
final say over monitoring banks, a stance that appeared to push
the talks backwards. One official from a non-euro zone country
said on Tuesday Schaeuble had softened his line since.

But France also has demands.

"We can envisage degrees of supervision depending on banks'
size, but on one condition -- that in the end the European
Central Bank holds the ultimate responsibility," Finance
Minister Pierre Moscovici told Reuters earlier this week.

This concern is shared by analysts. "The ECB ultimately is
the Governing Council," said Guntram Wolff of Bruegel, a think
tank in Brussels. "Not leaving the final say with the Governing
Council means you create a new institution. If you create a new
institution, it would not have the credibility of the ECB."

PILLARS FOR UNION

Cyprus, which as holder of the rotating EU presidency chairs
the meeting, will put a proposal for compromise before the
ministers.

In the compromise document obtained by Reuters, Cyprus
recommends that banks with assets of 30 billion euros or with
assets larger than one fifth of their country's economic output
be supervised directly by the ECB rather than national
supervisors. Critically, however, they leave the ECB with the
authority to widen this remit to problem banks.

The central bank's Governing Council would keep the final
say in supervision, according to the proposal, which also lays
emphasis on the need for a clear separation between monetary
policy and supervision.

Ministers will also examine a Cypriot suggestion to allow
the ECB take longer than until January 1 2014 to fully take on
its role.

EU leaders hope that by setting up a single banking
authority and later establishing a resolution fund for
distressed banks, they will stop troubled banks from dragging
their countries into crisis. They also hope to set up a way of
coordinating national deposit guarantee schemes.

But while most countries support the idea of supervision,
which is the first pillar of a full banking union, they disagree
on how to structure it and how far to go in sharing bank risks.

All 27 countries in the European Union must give their
approval for the project to go ahead, even if only those
countries in the euro zone will fall under the banking union to
begin with.

Sweden's Finance Minister Anders Borg, who had previously
questioned the legal basis of the scheme, said that while it was
unlikely to join he may allow other countries to press ahead if
pan-EU voting safeguards are in place.

Britain has also demanded a voting scheme for countries
outside the union to block certain decisions taken by the ECB, a
veto that is opposed within the euro zone.

Ratings agency Fitch said the ECB's pledge to buy the bonds
of troubled countries if they seek euro zone aid had lifted
pressure for an immediate deal.

"(ECB President) Mario Draghi's announcement (on buying
bonds) has taken the pressure off banking union negotiations for
now," said Tony Stringer, a sovereign debt analyst at Fitch. "If
they are able to demonstrate some progress as well as a clear
path ahead, that may be enough for investors in the near term."